A mini-bubble

[Andy Lang]

We are not going to have a healthy stock market until Bush leaves
office.

Here is Krugman on the subject of the recent climb:

Still Blowing Bubbles
By PAUL KRUGMAN
The current surge in stocks looks more like another bubble
than it does like an economic recovery.

June 20, 2003
Still Blowing Bubbles
By PAUL KRUGMAN


The big rise in the stock market is definitely telling us something.
Bulls think it says the economy is about to take off. But I think
it's a sign that America is still blowing bubbles — that a three-year
bear market and the biggest corporate scandals in history haven't
cured investors of irrational exuberance yet.

Or, to put it another way: it's hard to find any real news to justify
the market's leap. Instead, investors seem to be buying stocks
because they are rising — which is pretty much the definition of a
bubble.

Before the Iraq war, optimists attributed the economy's weakness to
prewar jitters. They predicted a great postwar economic surge: oil
prices would plunge, reassured consumers would open their wallets and
businesses would start investing again.

We're still waiting. Oil prices are off their prewar highs, but
they're still higher than they were last fall. Consumers seem to be
spending a bit more, but we're talking about fractions of a percent.
And businesses are still more interested in cutting costs and laying
off workers than buying new capital goods.

There have been some pieces of good news — a not-too-bad
manufacturing survey here, a pretty good housing-starts number there.
But there has also been bad news, especially regarding employment.
Payrolls are still contracting; since the U.S. economy has to create
80,000 jobs a month just to keep up with a growing working-age
population, the already miserable job market continues to get worse.

Don't tax cuts and low interest rates create the conditions for an
economic rebound? Well, interest rates have been low for a while. And
everything that has happened since 2001 suggests that Bush-style tax
cuts — which, because they are targeted on the very affluent,
basically give people with plenty of cash to spare even more cash to
spare — provide very little employment bang per deficit buck.
Meanwhile, desperate state and local governments are continuing to
slash services and, in a growing number of cases, raising taxes,
undoing much or all of the stimulus from the federal government.

Does the collective wisdom of the investor class perceive an
imminent, vigorous recovery that is invisible in the data? The market
isn't always right. It wasn't right when it sent the Nasdaq to 5000;
it wasn't right in the fall of 2001, the summer of 2002 or the late
fall of 2002 — three would-be bull markets that fizzled. And selling
by corporate insiders hit a two-year high in May.

Meanwhile, the average stock is selling at 31 times earnings, twice
the historical norm. And if you take into account pension liabilities
and the cost of stock options, that number goes above 40.

A few months ago, some analysts began to argue that because interest
rates were so low, even today's very expensive stocks were a good
buy. I don't agree, but that's a long discussion. What's clear,
however, is that investors' big move back into the market has been
driven not by careful comparison of returns, but by the fact that
stocks are rising — and the fear that if you don't buy stocks, you'll
miss out on a good thing. The new bull market isn't forecasting
anything; it's just feeding on itself.

Could the story I'm telling be wrong? Of course. Maybe a vigorous,
though still invisible, economic recovery will deliver the sustained,
double-digit earnings growth that analysts — apparently not chastened
at all by recent history — are once again predicting.

But even if that happy scenario comes to pass, it's hard to justify
current stock prices — because if the economy booms, the low interest
rates that might conceivably make stocks worth buying at 30 times
earnings will soon go away. If and when businesses start borrowing
again, they'll have to compete for funds with the federal government,
which will be running $400-billion-plus deficits as far as the eye
can see. Meanwhile, foreigners won't keep lending us $500 billion
each year; in fact, private investment inflows into the United States
have already dried up.

Oh, and the banana-republic policies now being followed in Washington
won't just drive up interest rates; they'll probably generate a full-
blown fiscal crisis one of these years. That can't be good for equity
prices.

In short, the current surge in stocks looks like another bubble, one
that will eventually burst.

Ladies and Gentlemen . . .

Paul Krugman, Stock Market Expert

[Andy Lang]

Similar sentiments have been expressed before by Warren Buffet.

Duhhhh!

Originally Posted by Andy Lang

Similar sentiments have been expressed before by Warren Buffet.

Duhhhh!

So then, why don't you quote Warren Buffet instead of Paul Krugman?

DDDDDDuuuuuuhhhhhhh!!!!!!!

[Spectrum]

Such eloquence. But the real question is, are you selling your stocks into this rally? Lets here the facts like "I like to hold 80% stocks but am still under weight at only 50%" "I sold stocks last week to maintain my underweight position"

Personally, I'm about 40% leveraged real estate (my bubbly home) and 20% stocks 40% bonds. I'm very bearish on stocks for this DECADE. Forget the two month rally and just keep rebalancing into and out of stocks as they gyrate. Match up capital gains and losses as you can. Does anyone know a way to short housing prices without selling your home?

[Dr T Non-Fan]

Originally Posted by Spectrum

Does anyone know a way to short housing prices without selling your home?

Sell your neighbor's home.

I'd try long-term long put options on REITs. Or sell futures on same. That would hedge your bubble-house. It might be difficult to replicate your house in REITs, though. Location is important, and REITs might not be so zeroed in on your neighborhood.
Another hedge would be treasury futures. Your house value is also tied to the low interest rates.

[wonderer]

Property taxes are also a significant factor in real estate prices.

Bloomberg in NYC seems to be giving fair warning that Republicans are going to use property taxes to limit real estate property appreciation.

Gotta keep all the horses workin so my men can get better whiskey ...

[E. Blackadder]

From Don Luskin.

As I've pointed out on my blog, The Conspiracy to Keep You Poor and Stupid, here's what Krugman was really saying back then about the market and the economy. On January 5, 2000, just nine days before the Dow Jones Industrial Average topped out at the never-seen-again level of 11,723, Krugman wrote in his still brand new New York Times column that

"Merely terrific"? You can't make this stuff up. This classic top-of-the-market epiphany for Krugman came after a decade of singing in a Greek chorus of Ivy League economists who were forecasting that Japan and Europe would take over the world economy and leave American industry in the dust (see Krugman's The Age of Diminished Expectations). Several weeks later, on February 27, after the Dow had drifted lower while the NASDAQ and the S&P 500 were still climbing toward their March 2000 peaks, Krugman said to ignore the falling Dow, and offered this apologia for the economy in his Times column:

Well, we still have employment levels that, by historical standards, are considered "full." And we certainly have low inflation (Krugman's more worried about deflation and a so-called "liquidity trap"). Yet how different his views are today. In Krugman's most recent Times column he asked,

Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn't always right. It wasn't right when it sent the Nasdaq to 5000; it wasn't right in the fall of 2001, the summer of 2002 or the late fall of 2002 — three would-be bull markets that fizzled.

New Krugman Truth Squad member Peter Harrigan wrote on his blog, Gammaholic,

Now Krugman just can't imagine that the market — which represents the aggregated opinions of all the "little people" he purports to fight for — might be smarter than he is. In 2000 the market forecasted a recession when Krugman was forecasting "terrific." And now it's forecasting a recovery, when Krugman is forecasting "catastrophe."

Why the optimism then, and the pessimism now? Could it be that for the 2000 presidential election, it was good for Democratic mouthpieces like Krugman to pretend that everything was wonderful? And now, for the 2004 election, it's good for the Democrats to pretend that everything is horrible.

[Paddyboy1]

How to short the property bubble (I'm writing an article on this topic so I have it memorized):

Move to southwest chicago or syracuse, ny. There you can find a program taht allows you to lock in your home equity. Not by real insurers, of course, the first program is guaranteed by a mandatory premium assessed on residents of 0.12% of asssessed value. The latter is funded by voluntary premiums and uncle Sam's gift of a $5M capital note. Or Goldman Sachs and Deutsche bank have issued warrants on the property prices in a)Greater London and b)the UK. There is a very comprehensive system here for tracking house sale prices. The warrants are very pricy. Lets say you want a put option at the money on your £110K home in greater london for a 12 month period. It will cost you around £10K. Ideally you'd offset that by selling-short (or writing) a call warrant at the same strike, which currently goes for about £10K also, making the insurance of your house's equity free net of transaction costs. But this market doesnt alllow short sales. But it is good for a speculater. Alternatively, sign up with London bookies IG Index or City Index which offer a number of interesting bets on regional UK proeprty markets. If you live in NY or CA, wait until year-end when a futures market aimed at investors trying to lock in their property values based on zip-specific commercial and personal real estate sales is supposed to go live with eyes towards expansion.